When the Largest Sponsor of Tenant-in-Common (TIC) Programs for 1031 Exchange Investors Merges With One of the Biggest Brokers in the Business, It Raises a Lot of Questions
|Anthony W. ("Tony") Thompson founded Triple Net Properties in 1998 and serves as Chairman of its parent company, NNN Realty Advisors, Inc. |
The news that NNN Realty Advisors will take control of Grubb & Ellis through a reverse merger was greeted by the industry with what might best be described as a collective, "Huh?" Followed in short order by another question, "Who ARE these guys?"
"It definitely caught me a little by surprise," agreed Steve Solomon, managing director for Jones Lang LaSalle in its recently opened South Bay office in Los Angeles.
It was more or less general knowledge within the industry that Grubb & Ellis was looking at options, Solomon said. But the consensus was that they would likely end up with another brokerage firm. "It's definitely an intriguing merger. My view is that NNN was more of an advisor for small investors, like Wells. But this certainly changes the dynamic."
Here are some of the deal points:
- Grubb & Ellis Inc. (NYSE:GBE) agreed to merge with privately held NNN Realty Advisors Inc. to form a publicly-traded real estate services company with a total capitalization of approximately $725 million.
- Under the merger agreement, Grubb & Ellis will issue 0.88 shares of common stock for each share of common stock held by NNN Realty Advisors shareholders. The combined entity will keep the Grubb & Ellis brand and continue to have its shares traded on the NYSE under the "GBE" ticker symbol.
- Following the merger, NNN Realty Advisors stockholders will own approximately 59% of the combined company while Grubb & Ellis stockholders will own approximately 41%.
- Scott D. Peters, president and CEO of NNN Realty Advisors, will become CEO of the combined entity, which will be headquartered in Santa Ana, CA, where NNN is based.
- Peters will also join the company's board of directors, which will be increased to nine members, with six nominees from NNN Realty Advisors and three from Grubb & Ellis.
- Anthony W. Thompson, founder and Chairman of the Board of NNN Realty Advisors, will join Grubb & Ellis as Chairman of the Board. C. Michael Kojaian, currently Chairman of the Board of Grubb & Ellis, will remain on the board of the new Grubb & Ellis.
"NNN and Grubb & Ellis have been doing a substantial amount of business for many years," Thompson said in a NNN/Grubb & Ellis conference call to investors Thursday. "This is a powerful combination offering a powerful alignment of services."
But while the proposed merger under which NNN would gain control over Grubb & Ellis caught many by surprise, some say it's just the type of move NNN's founder and Chairman, Tony Thompson, would make.
"This is the guy who got into the TIC 1031 exchange business before anyone else even knew what it was about and built this firm into the biggest outfit going," according to a competitor. "He's every bit a visionary, and a shrewd operator."
Founded by Thompson in 1998, NNN Realty Advisors is one of the largest sponsors of securitized TIC transactions (an offering of real interests marketed as securities.) The firm believes it controls approximately 13.6% of the total securitized TIC market based on statistics available for the industry as a whole. These programs enable investors to engage in tax-deferred exchanges of real property and to invest in other real estate investment vehicles.
NNN sells its TIC offerings through an extensive network of broker-dealer relationships. The firm also acquires, manages and sells the real estate in its programs, earning fees. Finally, NNN sponsors and advises several public non-traded REITs (ones that are registered with the SEC but whose shares are not traded on a national securities exchange) and real estate investment funds.
Having already built NNN's subsidiary, Triple Net Properties, into the largest sponsor of tenant-in-common programs for 1031 exchange investors, Thompson appears bent on taking NNN to the next level.
Last year, the firm acquired 42 properties for more than $1.3 billion for its TIC programs, and increasingly targeted institutional-quality buildings for acquisition, such as the 30-story 123 North Wacker office tower in Chicago's West Loop. It also sold 23 properties for $840 million, earning more than $100 million in profit.
In a bid to expand its property type offerings, NNN launched two new REIT offerings, NNN Apartment REIT Inc. and NNN Healthcare/Office REIT Inc., which were expected to raise an estimated $500 million in 2007 from stock sales.
NNN Realty Advisors also closed a $160 million private placement of common stock to institutional investors and "accredited investors" through Friedman Billings Ramsey & CO. (FBR). NNN said it planned to use the proceeds primarily to repay debt, fund acquisitions and provide short-term financing for its sponsored programs.
Managing all those property acquisitions and dispositions takes manpower. The firm said it (and its leasing broker partners) negotiated 1.3 million square feet in new leases and 1.9 million square feet in renewals.
Having access to Grubb & Ellis' 109 owned and affiliate offices throughout the U.S. would greatly expand NNN's footprint -- and its ability to serve the management and leasing needs of its real estate assets not to mention greatly enhancing its ability to source property acquisitions and dispositions.
"There's no question the merger offers a win-win situation for NNN and Grubb & Ellis shareholders," believes Ed Indvik, Chairman of Lee & Associates' board of directors. NNN wins by adding a sales force that will diversify its operational and financial structure. Grubb & Ellis also wins by diversifying away from the cyclical nature of the brokerage business. And the potential operational and strategic benefits are not lost on investors, Indvik added, noting that G&E stock enjoyed an 11 percent bump yesterday.
But Indvik also said the combination will raise potential conflict of interest concerns. "I would think for asset management, leasing and disposition, the salesperson has a very difficult obstacle to overcome in convincing the non-Triple Net client he’s their best alternative," Indvik said.
And NNN will face a challenge in convincing investors that a particular Grubb & Ellis agent was selected because he was the superior choice -- as opposed to the most financially beneficial for Triple Net/Grubb & Ellis, he added.
On the other hand, one could argue what better way to address some of those investor concerns and lingering issues facing the complex and arcane field of 1031 property exchanges than by capitalizing on the trust and goodwill built up by Grubb & Ellis, a firm with a reputation described by CEO Mark Rose in his most recent letter to shareholders as the "safe pair of hands" in the real estate services industry.
Thompson told investors Thursday the deal will immediately expand Grubb’s property management business by bringing significant NNN assets that are managed by third parties under the combined companies' umbrella.
NNN's capital raising will drive revenues to multiple Grubb & Ellis business lines, Thompson said -- from properties purchased on behalf of programs to be managed by Grubb to the transaction fees and other brokerage fees.
"Cross-selling opportunties are abundant between the two companies," he said.
Although the details of folding the companies and their work forces together have yet to be worked out, Thompson said "opportunities for cost savings in a merger of this size are always apparent, and will give further margin growth."
Investor goodwill and an instant national broker network notwithstanding, the other, and perhaps most valued, element to a NNN-Grubb & Ellis combination may reside in Grubb & Ellis' status as a publicly traded firm.
NNN has made no secret of its plans to pursue an initial public offering. In fact, it filed an "S-1" registration statement with the U.S. Securities and Exchange Commission on May 7 of this year and said it fully expected to pursue an IPO by the end of 2007.
But all that likely changed after striking the deal with Grubb & Ellis. We had to go back to our old Finance 101 textbook to brush up on the terminology, but we found it:
"There are two ways for a privately held company to go public: Through an initial public offering of stock (IPO), or via reverse takeover."
In a reverse takeover, shareholders of the private company purchase control of the public company and then merge it with the private company. The private company shareholders typically receive a substantial majority of the shares of the public company and control of its board of directors. What's more, if the publicly traded company being taken over is already registered with the SEC, the private company can avoid the expensive and time-consuming regulatory review typically associated with an IPO.
So, going public through a reverse takeover with Grubb & Ellis would enable NNN to become publicly held at a lesser cost, and with less stock dilution than through an IPO. And it's a lot faster. The process for launching a conventional IPO can take a year or longer. During the time it can take to put an IPO together, market conditions can deteriorate, adding risk and uncertainty to completing the process. A reverse takeover, on the other hand, can be completed in as little as 30 days.
Both NNN and Grubb & Ellis declined to discuss the IPO during the conference call, referring investors to SEC documents.